Deutsche Bank's Airline Update: Delta, American Upgraded To Buy

A bullish thesis for Delta Air Lines, Inc. DAL and American Airlines Group Inc AAL is justified after metrics in their earnings reports came in ahead of optimistic projections, according to Deutsche Bank.

The Analyst

Deutsche Bank's Michael Linenberg upgraded Delta Air Lines from Hold to Buy with a price target lifted from $53 to $60.

The analyst upgraded American Airlines from Hold to Buy with a price target lifted from $40 to $47.

The Thesis

Airline stocks, including Delta and American, were expected to experience headwinds from higher fuel prices and the potential for recapturing only half of their year-over-year increase in fuel costs, Linenberg said in the upgrade note. (See his track record here.) 

Yet Delta's earnings report showed a recapture rate of 85 percent, while rival United Continental Holdings Inc UAL showed a recapture rate of 100 percent in its quarterly print, the analyst said. Both metrics were much better than expected, he said. 

While American Airlines has yet to report its third-quarter results, scheduled for Oct. 25, Linenberg said investors should  be increasingly confident the airline will follow suit and show it was able to offset a big portion of higher fuel expenses.

American Airlines shares are down 36 percent since the start of 2018 and are trading at 6.7 times 2019 estimated EPS, according to Deutsche Bank.

Delta is down by 5 percent over the same time period and trading at 9.1 times 2019 estimated EPS, Linenberg said.

Both valuations offer investors a compelling entry point amid a stronger-than-expected revenue backdrop and the industry's ability to better manage its P&L at a time of higher fuel prices, the analyst said. 

Price Action

Delta Air Lines shares were up 2.65 percent at $54.52 at the time of publication Wednesday, while American Airlines was up 3.73 percent at $34.52. 

Related Links:

Macquarie Cites Valuation Concerns In United Continental Downgrade

Analyst: Delta Air Lines Deserves A Higher Valuation

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